Frp Holdings, Inc. Q2 FY2020 Earnings Call

The following is a recording for John Milton with Florida Rock Properties on Thursday, August 6, 2020, at 9 A.M. Central Time. Excuse me everyone, we now have a presentation conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the presentation, we will open the floor for questions. I would now like to turn the conference over to Mr. John Baker, Chairman and CEO. Please go ahead.

Good morning. This is John Baker II, Chairman and CEO of FRP Holdings. With me today are David deVilliers, Jr., our President; John Baker III, our CFO; John Milton, our General Counsel; John Klopfenstein, our Chief Accounting Officer; and David deVilliers III, our Executive VP. This call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities and Exchange Act of 1934. Such statements represent management's current views with respect to financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties, which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ materially from the results discussed in such forward-looking statements. Risk Factors are discussed in our 10-Q and other SEC filings. We have no obligation to revise or update any forward-looking statements other than imposed by law as a result of future events or new information. You are, therefore, cautioned not to place undue reliance on such forward-looking statements. Thank you all for joining us this morning. As you've undoubtedly summarized from the press release, we are well along in the remaking of our company after the sale of our warehouses in 2019. During the quarter, we purchased 215,000 shares of our stock at an average price of $41.39. We currently have authorization to continue to purchase up to $8.5 million in additional stock and plan to do so opportunistically. Our quarterly earnings were impacted by the decision to delay our annual stock grants until the Annual Meeting. The previous grants had been given in December 2018. Our results were also impacted by COVID-19 as our retail establishments at our Dock 79 investment in Washington were closed during portions of the quarter. And while they are resuming operations today, they are far slower than a year ago, which also impacts our revenues. Our leasing efforts at The Maren have been great, though we have spent heavily to achieve that penetration. We continue with the development of our mixed-use projects at Bryant Street and a new project called Half Street in Washington, D.C., as well as the two projects we have invested in with Woodfield properties in Greenville, South Carolina. Our cash and investments have remained relatively constant at around $165 million despite these investments. Our aggregates and royalty segment remain steady at a high level. Revenues were down slightly as we no longer receive double minimum royalties on our Lake Louisa project in Central Florida with Cemex, as they achieved their goal of permitting the property. Let me now turn it over to David deVilliers, Jr., our President, so he can walk you through our operations in more detail. David?

Thank you, John, and good day to those on the call this morning. Let me now add a bit of detail to the highlights provided by John in his opening remarks. As of the close of the second quarter, our Asset Management segment consisted of four commercial properties: the Cranberry Business Center in Harford County, Maryland; the completed Hollander spec industrial building in Baltimore, Maryland; the land at 21st Street in Jacksonville, Florida; and lastly, our home office, a multi-tenanted office building in Sparks, Maryland. In June of last year, the company finalized the liquidation of assets that made up our entire warehouse platform of 43 buildings, totaling just over 4 million square feet prior to its sale in May of 2018. This quarter, we continue to grow the occupancy at Cranberry Run from 54% as of March 31 to 71.9% at quarter's end. The significant $2 million renovation project is now complete, and the upgrades of the buildings have been well received by the market. Total revenues for this business segment were $716,000, up $54,000 over the same period last year, albeit with a different set of assets. Operating profit was $58,000, up $69,000 from an operating loss of $11,000 in the same period last year, primarily due to our new spec building at 1801 62nd Street reaching full occupancy. Of note, subsequent to the end of the quarter, on July 31, the warehouse at 1801 62nd Street was sold for $12.3 million, resulting in a gain on sale of $3.8 million, the proceeds of which have been placed in a 1031 exchange fund. In the Mining and Royalties segment, total revenues were $2,402,000 versus $2,633,000 in the same period last year. Total operating profit was $2,110,000, a decrease of $312,000 versus $2,422,000. The primary reason, as John alluded to in his opening remarks, for this decrease in revenue and operating profit is that the double minimum royalties are no longer being paid at Lake Louisa due to our tenant having received the final permit to begin mining in July of 2019. On another note, we sold our Gulf Hammock property during the quarter for $2,510,000, generating a gain on sale of $1.7 million. Our outlook for the short and long term remains very positive regarding this business segment. Our annualized revenue of $9,174,000 and the revenue for the last 12 months of $9,163,000 would still be the second-best year in the history of this business segment. With respect to ongoing and new projects in our Development segment, highlights include: one, Phase 1 of our joint venture with St. John Properties consisting of four buildings totaling 72,080 square feet of single-story office and 27,950 square feet of small bay retail space in Baltimore County, Maryland, remained 44% occupied overall. Two, our entitlements are ongoing for our project in Hampstead, Maryland, known as Hampstead Overlook, which received concept plan approval this spring for 255 single-family and townhouse building lots as proposed. Three, we have an update to our land development venture at Hyde Park in Baltimore County, Maryland. The first phase of settlement closed in May of this year on 122 townhouse and four single-family building lots. The settlement produced $2.67 million in principal and accrued interest payments. Four, regarding our residential development project called Amber Ridge, located in Prince George's County, Maryland, entitlements are currently being pursued, and two national homebuilders are under contract to purchase all of the 187 lots after we complete the infrastructure development. The first section of lots is scheduled to be turned over in the second quarter of 2021. Five, Phase II of our RiverFront on the Anacostia project in Washington, D.C., now known as Maren, welcomed its first tenant in late March. As John mentioned in his opening remarks, leasing activities and occupancies have exceeded our projections. This 14-story mixed-use development consists of 264 apartments and 6,937 square feet of first-floor retail. As with Dock 79, this is a joint venture with MidAtlantic Realty Partners, or MRP, in which FRP is the major partner. As of June 30, Maren was 98% complete, with the top floor housing the pool and amenities package being the only remaining part to complete fully. Notably, the building was 45% leased and 23% occupied as of the end of June. Since then, the Maren has maintained a robust leasing and occupancy trend. As of August 3, the project was 60.98% leased and 47.73% occupied. Finally, we executed the lease for the large retail suite totaling 5,111 rental square feet at the end of June. Moving on, the first phase of our mixed-use residential and retail development in northeast Washington, D.C., known as Bryant Street, is now 67% complete as of June 30, with the first of four buildings scheduled for delivery in the fourth quarter of this year, and the remaining three buildings expected to be complete in the fourth quarter of 2021. This phase consists of 487 apartments and 85,681 square feet of first-floor and freestanding retail. Approximately 44,000 square feet of the retail is pre-leased. The project is running on time and is within budget and is located in a designated opportunity zone, allowing us to defer a significant tax liability associated with the 2018 warehouse platform sale. This project is also a joint venture with MRP with FRP being the major partner. Next, in December of 2019, the company contributed $37.3 million of equity into a new joint venture agreement with MRP for the development of a mixed-use project known as 1800 Half Street. The development is located in the Buzzard Point area of Washington, D.C., less than a half a mile downriver from Dock 79 and the Maren. It lies directly between our two-acre site on the Anacostia, currently under lease with Vulcan Materials, and Audi Field, the home stadium of the D.C. United soccer team. The 10-story structure will have 344 apartments and 11,246 square feet of ground floor retail. The project is a qualified opportunity zone investment and will defer just over $10 million in taxes associated with the 2018 warehouse platform sale. During the first quarter of this year, the venture purchased the land and is currently in the process of demolishing the existing structure and making other preparations for vertical construction that will start during the third quarter of this year. Also, in December of 2019, we entered into a joint venture agreement with Woodfield Development, a new strategic partner to invest in two separate and distinct development projects in Greenville, South Carolina. Woodfield has extensive experience in developing residential and mixed projects throughout the southeast and Washington, D.C. The first project named Riverside is a 200-unit multifamily project in which FRP has contributed $6.2 million in exchange for a 40% ownership interest. Construction began during the first quarter of this year and is expected to be completed in the third quarter of 2021. This is a qualified opportunity zone investment. Our second project with Woodfield is a 227-unit mixed-use development called 408 Jackson, a nod to Shoeless Joe Jackson, who actually grew up on this site and which is adjacent to Greenville's Minor League Baseball stadium, which houses an affiliate of the Boston Red Sox. This project will also include 4,700 square feet of retail space. FRP has received a 40% ownership position in this project in exchange for $9.7 million. Closing on the property occurred at the end of April, construction has begun, and the project should be ready to receive its first tenant in the second quarter of 2022. This project is also a qualified opportunity zone investment and, along with Riverside, allows us to defer a total of $4.3 million in taxes. Moving on to our Stabilized Joint Venture business segment. Relative to Dock 79, net operating income for the quarter was $1,092,000, down 11% over the same period last year. The average occupancy during the quarter for this part was 91.5%, down from 93.52% the quarter before. This past quarter's retention rate was 62.3%, up from 54% for the previous quarter, but with no rate increases due to a statutory prohibition by the District of Columbia due to COVID, which is currently expected to last through the end of the year. We will continue to renew and sign tenants at their existing rates, preferring terms of occupancy over chasing rent growth. The retail component of Dock 79, which totals approximately 14,600 square feet, remained at 76% occupied and 76% leased as of the end of the quarter. However, our retail tenants were shut down due to the COVID-19 pandemic, with the exception of one of the restaurants being partially opened for carryout only. All three retail tenants were allowed to open, albeit nowhere near capacity as of June 22, and rent payments have resumed for the most part. Our key guiding principle in this situation is maintaining open communication while preserving our rights as a landlord, while we wait to see what the future holds for these businesses. The goal is to assist our existing tenant base in ultimately regaining their financial viability. Re-tenanting those retail spaces would be expensive and time-consuming. We partnered with these existing tenants because we believed in their concepts and business plans, and we continue to do so. The remaining retail space had an executed letter of intent to lease prior to the COVID-19 outbreak. The suite is now back on the market. Dock 79 is a joint venture between MRP in which FRP is the majority partner. Relative to the new asset introduced to this business segment in July of last year, the 294-unit Hickory Creek apartment complex in Richmond, Virginia, things are pretty much status quo in the second quarter of this year with a 94.6% occupancy as of June 30. The distribution was on time and for the anticipated amount of $85,000. Our $6 million investment in this project is part of a 1031 like-kind exchange. The complex was constructed in 1984 and substantially renovated in 2016. The business plan calls for further refurbishments to the interiors of the apartments and the increase of rents prior to selling the project at a greater value after an appropriate hold period. While FRP is fortunate to have a focused and talented team that has recently been quite active in leasing and executing acquisitions and sales across multiple business segments, it's important to note that we, like the rest of society, have been stunned by the state of the world. We are operating under a new set of rules due to the COVID pandemic. Our operations, communications, workflow, and access have all changed, but we are committed to our mission and remain mindful of the unprecedented impact COVID has and is having on us all. We're considered an essential business and continue to operate at full capacity while adhering to the guidance of the federal government and orders issued by state and local authorities. Our offices at Loveton Circle are open for limited activities on-site, and all employees are set up to operate fully from their homes. When required, our employees are physically distancing and employing other measures to ensure the protection of the folks with whom we interact as we go about our business. At the end of the first quarter, requests for forbearance were limited to four tenants, three retail tenants at Dock 79 and one small office tenant whose business focus is related to hotel services. At the end of the second quarter, all but one of the above tenants had made significant progress toward clearing late rents and expenses. To be sure, FRP is not unscathed by COVID-19. However, the retail tenants of Dock 79 represent 6% of the company's net operating income. For the most part, they appear to be faring better than most in their category. The vast majority of our tenants continue to operate, though perhaps on revised schedules and conditions, and they continue to pay rent as usual. At this point, we have been given no reason to expect this situation to change. We're mindful of the challenges that are facing our tenants, partners, and employees every day, and we strive to be good stewards of our stockholders' faith as well as the trust and support of our business partners. COVID-19 marks a new beginning and will change the way we behave personally and professionally, but with all challenges come opportunity. Thank you. And I'll now turn the call back to John.

Thanks, David. Now let's turn it over to our guests to see if there are any questions that they might have of us at this time.

Thank you. At this time, we'll open the floor for questions. Our first question comes from Curtis Jensen with Robotti & Company.

Hey. Good morning, fellows. Can you hear me all right?

Yes. Good morning.

Good morning.

Does the current situation, including the pandemic and social unrest in major cities, make you concerned about the future of urban multifamily housing, or do you perceive this as a temporary issue?

It would have to give you pause because it's a complete unknown at this point, Curtis, but if there's one place that's going to be vibrant, I would say it would be Washington, D.C., and that, of course, is really the centerpiece of most of our development. So we're not worried about it. You have to be cognizant of it and watching it. But I wouldn't say that that's a big deal in our mind at this point.

Okay. Are you able to conduct in-person tours at Dock 79 and the Maren? Can people physically visit the building to view apartments, or are the tours virtual?

David, take that.

We are conducting many virtual tours, but we are also offering a significant number of in-person tours, so we are doing both.

Okay. And do you see other buildings in the area? I mean, are people having to offer incentives and cutting rents and things like that around that?

Again, not to the extent that you would think. I think we've been offering a half a month at Dock 79 and about the equivalent of that at The Maren. It hasn't been a large discount, and the rents per square foot that we're getting are pretty strong. And God knows the velocity of The Maren has just been unbelievable.

I mean I'm kind of curious, if somebody were looking at both buildings, what do you think is kind of the distinguishing factors for people in The Maren? Obviously, a couple of years newer, a little bit. But in terms of amenities or apartment layouts? Or what's kind of the differentiator between the two?

Both about the same, Curtis. It's one, like you said, one of them is a little bit newer than the other one. We've had, I think, a total of about, I think, at last count, 9 or 10 people that have moved from Dock 79 to Maren since it's opened up. It's a little bit more per square foot. Obviously, same basic locations, same basic amenity package. Size of the apartments are similar; quality might be a little bit different, but they're pretty close together.

Okay. Dock friendly? The Maren is?

It's very much the same.

Last question, and I'll let you go. Out of Buzzard Point, is there any discussion with Vulcan about or any thoughts about whether they're likely to exercise their option to renew their lease there? Or, I mean, you're pouring a little more capital into that neighborhood, so I'm just kind of curious whether there's any thoughts about what Vulcan might do?

They will renew it. There's no question about that.

Are you able to proceed with the latest project you're working on there? Or is it going to impact you, do you think?

Our thought is twofold. One, having a view of a concrete plan is not as beautiful to everyone as it might be to me. But the important thing there is that we started right now in the middle of a pandemic, and I think I'm correct on this, David, that we will be the only new building coming online at that period of time. So that does give us an advantage as we begin to lease up. The important thing, I think, is to remember that it is an opportunity zone investment. And while, obviously, you want a cash flow, we feel like we can get it leased up and begin to cash flow. And when we'll really care about what this place looks like is 10 years from now when we go to sell it, if we do go to sell it. And at that point, it is going to be surrounded by what I would say are stunning buildings, and it will be a gorgeous spot. So it may be a slower start than The Maren, for instance. But it fits within our business plan. And we want to get as much penetration in that market as we can, and that's how we were able to do it with this one.

Okay. So Vulcan essentially has just a ground lease and around $1 million for the year?

Yes, that's right. Something that's close.

Thank you. Our next question comes from Stephen Farrell with Oppenheimer.

I'm doing well. I have a few questions here. Regarding the new JVs with Woodfield, what sort of internal rates of return are you expecting from the two new partnerships?

David, would you take that?

We're looking at these opportunity zone projects, but that's not the primary reason for our involvement. We're enthusiastic about partnering with Woodfield, as we believe they are located in excellent areas and are at the forefront of development. While we would love to achieve the highest internal rates, we are definitely targeting returns that are well into the double digits.

Great. Thank you. And your relationship with Woodfield, do you see these two new properties as sort of a stepping stone into bigger projects in the future?

We certainly would like to think so. Our plan, as a company, is to align ourselves with third-party platforms that have similar philosophies. We provide a lot of insight from our background. And so far, it seems to be working pretty well. But we look and hope to be able to spend some more time with them as we move forward.

Great. And during the quarter, did you start to see any potential deals? And how would you characterize them?

We are actively exploring a variety of deals, mainly in the mixed-use and industrial asset sectors, and we have considered several options. However, we decided to take a pause at the last moment. If it weren't for the COVID situation, we likely would have pursued more opportunities. Nevertheless, we are still looking for potential deals.

And are you seeing in D.C., the prices of multifamily sort of coming down with the uncertainty around the length of the rent freeze?

The rent freeze is, right now, is up through the end of October, but we lease out about 60 days in advance. So that's why we said in our conference call that we're not going to be looking for any rent increases until after the beginning of the year. The interesting thing, though, is that the rents that we are renewing, we're kind of above-market rents when we did it last year. So they're pretty strong rents today. So for us, it's a bit of a pause. But as I said, we'd rather have tenants paying rent than chasing rent for the deferred time.

And Steve, to expand on that a bit, we have a number of mixed-use projects underway simultaneously. Unless we come across an exceptional opportunity, we believe it's best to focus on completing these projects and assessing their performance without overextending ourselves. Each project carries debt, and we're committed to ensuring that we can fulfill our obligations regardless of any adverse situations. Currently, we're more focused on industrial development opportunities, as evidenced by the significant profit we made from the project we sold last week. This reflects the strong demand for industrial spaces, particularly in relation to the Amazon-driven market we are part of; it's thriving right now. Therefore, we will likely shift our focus in that direction for some time.

Great. And then with the Hollander Business Park, where you have the remaining acres there as well. Are you planning to develop those sooner because of the environment around the warehouse?

Yes.

We have either just broken ground or will be breaking ground next week on two buildings that are right next to the one we just sold.

Okay. And you said you were looking at deals for mixed-use and industrial, and you just sold the Gulf Hammock property. Is there any interest in adding to the mining land that you currently have? And at what price is, let's say, an acre of minable land attractive to you, around 15,000 or somewhere around that?

We are very interested in your question. However, it's quite difficult to acquire those lands. We assume the operators already own the land, and we have spoken with all the major aggregate firms. Unless they secure a cash buy-in, we don’t expect to significantly expand our aggregate land holdings. Each project has unique pricing considerations, and we typically aim for a 6% or 7% return from any project. If we were to purchase land, we would require them to pay us a minimum royalty that matches the 6% or 7% along with an earned royalty. This way, as prices increase, royalties would also rise. Nevertheless, while this is our business model, it seems unlikely that we will achieve substantial growth in this area.

Thank you. I'm not sure if there's anyone else waiting to ask questions, but I'm happy to let them go ahead, or if not, I have a few more questions myself.

Why don't we let somebody else if there is somebody? And if not, we'll just come back to you.

Our next question comes from Bill Chen with Rhizome Partners.

Hey guys. A couple of questions. I think you disclosed that you're selling the lot at Lakeside Business Park. Did that close? Has that been sold already? Or is that sometime in the future?

They were sold in April.

Okay. I understand. The next question is about Dock 79. How do we recognize revenue when we have a tenant, especially since those retail tenants are not open? Do we not recognize those revenues at all? Or do we recognize them but treat them as a receivable? Please clarify that for me. Additionally, could you provide more detail on how much of the decrease in revenue and NOI is due to lower occupancy, specifically comparing the multifamily side to the retail side?

Bill, this is David deVilliers. Regarding the decline in NOI, we experienced a slight decrease in occupancy during the second quarter. However, we are optimistic that we will return to 93% to 94% occupancy soon, particularly on the residential front. For the retail segment, we bill our tenants and maintain an allowance for doubtful accounts, which we will review as we progress further into the year. When accounts are overdue by more than 90 days, we take a portion of that amount and establish an allowance for doubtful accounts. It's worth noting that all three of our retail tenants are back in operation, at least partially. Two of them have settled all their outstanding operating expenses and paid the rent for June and July, leaving only April and May as pending payments. As for the third tenant, we do have an ongoing allowance for doubtful accounts, but they have resumed operations and are performing well. We are monitoring their business to track revenue growth, and we anticipate addressing those deferred rents after the beginning of the year, especially as we approach the baseball season, when their earnings typically increase.

Bill, one of the big things that occurred last year was when they really do well, we get bonus rents based on their revenues. And obviously, that isn't happening now, but it did happen last year.

Got you. That's really helpful guys. Thank you. Those are all my questions. So if you have a gentleman who wants to jump back next question, and then I'll go back from here.

Thank you, Bill.

Our next question is a follow-up from Stephen Farrell.

Okay. I'm just picking where we left off here. Absent a big deal, and with the stock currently trading where it is, buybacks are wildly accretive to the underlying value of the properties. At what point do you decide to stop looking for deals and step up buybacks in a really significant way?

Of course, we would play those cards as they come. But what I can tell you is because of the limitations on how much we can buy as the company, we've been buying about as fast as we can go without doing something like a tender offer or something like that. I'm much more interested in preserving our excess cash at this point to get us through COVID and make sure that we can handle everything we've got on our plate. And I think we've got that covered in stage right now.

No. Yes, I agree. Good to keep cash on hand in case anything that impacts the business happens. Just as long-term shareholders, we would obviously prefer buybacks versus any sort of special dividend. And I just wanted to relay that.

Okay. Thank you. That's good to hear.

In the post-COVID world, do you believe the first-floor retail model will change? Does this lead you to reconsider any future developments or how you will utilize the first floor?

David, why don't you take that?

I think we have to wait and see, Steve. Generally, retail has been a pretty small amount of these buildings with the exception of Bryant Street, and that's a little bit more. We think that restaurants are an interesting dynamic. Food halls are a consideration as opposed to fixed retail. There's other things that we look at. But we try to come up with a retail component that you can't get online. Now we want to support the residents with different types of amenities. We think the right retail component goes a long way to helping, not only the residential buildings stay filled up, but a good retail mix helps everybody in the retail component.

Right. And you mentioned the Bryant Street, and you have the first of four buildings coming to market at the end of this year. Do you think under the current landscape, it sort of changes any prospects there?

We don't believe so. The first phase is significant, consisting of four separate buildings. The initial one is somewhat positioned to the side. We have a strong property management company, Bozzuto, and we plan to begin the pre-leasing process in the fourth quarter. The model has been well received by visitors on an as-is basis, so we are enthusiastic about the project, and the neighborhood appears to share that excitement. We'll just have to wait and see how it unfolds.

Thank you. There are no additional questions at this time.

Okay. Well, thank you all. I really appreciate the dialogue and really, really, really good questions. While these are uncertain times, I must admit my feeling is that the lumps we have taken seem small and the accomplishments are amazing given the times that we are in. Our team is performing extraordinarily well. We still face hurdles with our retail operations, as you've heard, both the existing and future. But the ability to maintain occupancy at Dock 79 and quickly rent demand vastly overshadows those. Our land and warehouse sales were literally at the top of the cycle prices. Having a very strong balance sheet with great liquidity is an important aspect of this confidence. I can assure you that we do not take lightly our obligation to return liquidity to you if that becomes prudent. For now, however, it is a pillar of strength for us, and we continue to hold the excess cash. I look forward to talking to you next quarter and appreciate your interest in FRP. Have a great day. Thanks.

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.